Why it is vital for parents to financially equip their children for college
Although most children are ready to face college socially and academically, many are ill-equipped to face the financial responsibilities attending college will impose—decisions on money that if handled unwisely could make or break a college career.
After all, most college-bound children will be living away from home for the first time. The odds are they never have had to make important financial decisions or even fully handled their own finances before now.
Read More »It’s up to you
You can make the difference. It is essential that parents equip their children with good financial practices and beliefs as early as possible, says Brooklyn Lowery, editorial director and credit card analyst for CardRatings.
Early education on financial literacy at home will mean greater satisfaction with their education and an increased likelihood that they will equip themselves as financially responsible adults, Lowery adds.
Guidelines on discussion topics
When you sit down and discuss finances with your college-bound children, it is important that you speak to them as adults, says Dr. Edward Horwitz, associate professor of practice at Creighton University’s Heider College of Business.
You should tell them you want to help them learn from the mistakes that you made, he says. You should not be seen as judging them. The decisions are theirs to make.
Advisers suggest discussing several topics with your college-bound children.
• Setting up a budget.
Explain how to set up a monthly budget to handle their expenses. Discuss what their monthly expenses will be and include them in the budget.
It might be necessary to look at the budget as something of a work in progress. Figure out the budget in principle before a child leaves for college and then tweak it during the first months of college. At the end of each month review how the budget has worked until a baseline is established.
An option is to talk to others, such as your child’s friends, siblings or cousins, who have undergone a similar process.
• Handling student loan money.
Among the expenses you will need to discuss are those involving student loans. Explain that the loan money should be used only for tuition, books, and room and board. Help them to understand the consequences of using that money in other ways. Doing so might cause them to face a situation in which they will not have enough money left to pay for, say, tuition.
• Daily living costs.
Talk about the money that they have on which to live. This is the money that does not include student loans.
Will they eat out? How often will they do so? How much money should be set aside for entertainment and clothing?
• Vacation expenses
If the college is out of state, they will want to return home on holidays, spring break, and at other times. Those expenses should also be in the budget. Break the anticipated expenses down into monthly amounts that they can set aside so they will not have to pay them all at once.
• Setting up a pre-loaded debit card.
Open a checking account for your child that includes a debit card. While at college, the student can pay for most items with the debit card or, for recurring amounts, with an automatic withdrawal from the checking account. When necessary, the student can withdraw cash from an ATM using the card. You should be a co-signer on the account.
To help your child budget, you should place the amount of money determined by the budget for that month in the checking account at the beginning of every month . Your child will have to learn to avoid running out of money before the end of the month as well as saving some of it for later use.
• Applying for a credit card.
A lesson from the Great Recession was that freshmen at college often obtained credit cards and made purchases on them without thinking things through, Creighton University’s Horwitz says. They did not realize the implications that they would have to pay the money back and, if they did not do so in full, they would incur really high interest rates on them.
Horwitz advises, therefore, that first-year college students should not apply for credit cards. If they need additional money they should ask you to work it out, he says.
If you do feel that your college student should have a credit card, however, allow your child to be an authorized user on your card. By doing that you will be able to set spending limits on the card. If the student uses the card responsibly, your student’s credit score will benefit.
Another way is to co-sign on your child’s credit card. By doing so, however, you have no control over the use of the card and you could be on the hook for large amounts of debt.
Avoid being judgmental.
Horwitz suggests that where possible you should let your children learn as they go. You want to empower them not only to manage their own expenses but also to survive financial problems that might arise and to understand how they can create income if they need more money.
Let them learn the lesson that by spending less in one month they can have a little more in the next month. If they have a job, encourage them to use the income carefully and not to spend it all at once.
The most significant aspect of this discussion is to keep talking and to conduct a dialog that is objective and not condescending, Horwitz adds.
Have the talk
Above all, it is vital that you talk about how to handle finances responsibly before your child sets off for college.
By doing so you will go a long way in helping your child to handle money decisions in the future and avoid potential pitfalls in the college years that could be harmful to your child’s financial future.
